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Strong demand after successfully running the FastTrac TechVenture program in the Fall of 2009, has prompted TECworks to offer the program again starting March 18th.

Some comments from previous participants:

“The FastTrac TechVenture course with TECworks is a wonderful opportunity, not only to learn the basics of entrepreneurship but to form relationships with both businessmen and investors. These are crucial for any startup, and create a foundation of networks that will last a lifetime. I recommend this program to anyone interested in starting a growth company.”

“I was always challenge driven, and in relentless pursuit of new adventures. I knew bits and pieces about entrepreneurship but I didn’t have the full comprehensive view of how new companies and startups are created, that was until I met Jan Bouten the executive director of the Techworks foundation. Jan introduced me to the FastTrac program that he was offering at the Fedex Entrepreneurship Center at the University of Memphis. For me, the program was a good overview of the challenges that new startups face during the first phase of growth. The program inspired me to develop my own elevator pitch and enabled me to learn about the process of working with venture capitalists to solicit funding for my future startup company.”

For a new startup, the journey from an idea to a working, successful business is a confusing and dangerous one. Real, practical advice from objective outsiders can make all the difference in helping a fledgling venture reach its goal.

LaunchMemphis is hosting the Business Plan Boot Camp: a two session experience where entrepreneurs will be given the tools they need for success. Experts from several fields will be on hand with hard-earned, practical advice, while attendees can get tailored feedback on their business plans in several break-out sessions.

Topics will include:

Business plan development

Legal issues for entrepreneurs

Marketing

Financial considerations for entrepreneurs

Gaining funding

Finding investors

Perfecting your pitch

LaunchMemphis’ goal is to foster entrepreneurial growth within the Memphis community. The group is non-profit and the cost of the BootCamp is $60 for two days filled with insight (and lunch and materials!).

The two sessions will take place on Saturday, August 15th and 22nd from 8:30 a.m. – 2:15 p.m. at the Mercury Launchpad located at:

Starting September 3rd, TECworks will offer the nationally recognized FastTrac TechVenture program developed by The Kauffman Foundation. The program will be offered in partnership with The FedEx Institute of Technology and The Leadership Academy.

Pretty simple, liquidation preference means that in a liquidity event, the VCs get preferential treatment. An example of the most common scenario is the easiest way to explain:

Say you’ve raised $7 million from VCs for 40% of your company. Down the road, you sell the company for $35 million. The shares the VCs got were Convertible Participating Preferred Series A shares, with a 1x liquidation preference. So what happens to the $35 million pie?

$35 million starting point

$7 million preferred return to VCs – they get their money back

$28 million left over

$11.2 million to the VCs for their 40% ownership

$16.8 million to the Common stock owners (Founders, employees)

So the VCs end up with $18.2 million of the proceeds, or 52%, even though they only had 40% ownership in the company.

Seems unfair? That can be argued both ways… but it’s something you’ll need to address in the term sheet negotiations. There were times where the 1x liquidation preference was a good deal, the worst I’ve seen is 3x. In the example above, that would mean the VCs would get 3x$7 million + 40%x$14 million = 76% of the proceeds!

Depending on your position of strength in the negotiation, you might be able to have no liquidation preference at all. What is more common is a sunset provision of some sort: e.g. a 3x sunset provision. This means that the VCs have preferred return up to 3x their original investment, but if the if the straight share ownership gives them more than a 3x return, the preference goes away.

The reason why liquidation preference was originally “invented” is for bad and so-so exits. Say the VCs put up $7 million and the company fails to ever really take off and ends up selling for $5 million. The argument is that the investors should be able to recoup as much of their original investment as possible in this failed scenario. It also serves as an incentive for management: if there were no preference, the management team could settle for a $5 million sale and walk away with $3 million for a mediocre outcome. Not fair for the VCs putting up $7 million.

There are many flavors and combinations of this term. The thing to do is to build a little spreadsheet and play with scenarios to see what you can live with and is fair to both parties. As always, consult a good attorney that knows VentureSpeak!

This past weekend was Memphis Startup Weekend 2.0, or lovingly known as MSUW2, organized by our friends at LaunchMemphis. It all started at 6PM on Friday and went for 48 hours straight. I thought it’d be a good event to go to and network with other entrepreneurial folks in Memphis. There probably was about a crowd of 60, all with different backgrounds: programmers, designers, marketers, sale people etc…

Overall, good times were had and some interesting web companies got (nearly) launched by 5PM on Sunday. The group I was part of had big plans to innovate the real estate industry, but we quickly realized that it’s hard to boil the ocean, especially in one short weekend. I wanted to share some of my learning moments of the past weekend and hopefully you can apply them in your startup.

It’s hard to merge

Our company was formed early on as a merger of three concepts that were loosely coupled, as all three had to do with real estate. The thought was that we’d be able to combine resources and grab a larger piece of the market quicker if we worked together. That works great in theory, but in reality we spend significant time spinning our wheels because of the merger. One reason was that all three founders were around at the time of the merger – none of us wanted to admit it, but we all thought that our idea was the “best” and should be the center of the company – the other two were add-ons. This is especially relevant when you’re trying to merge startups, since there is a lot personal pride involved. Often startups merge to pool capital and create more runway, without spending enough time to really research the synergies in product, business model etc… Too often the math works out to be 1+1=0.

Don’t forget about the Cost Streams

Revenue streams are good and the more of them you uncover for your business, the better. But most revenue streams come with an associated cost stream… and unfortunately, it flows in the opposite direction.

We got pretty excited when we did a quick bottom up market sizing activity for the business and came out at an attainable $35 million revenue business. But when we looked closer, we realized that the actual sales process to obtain this revenue was pretty hands-on, high level and “one-at-a-time”. This implies hiring expensive sales people. This works if your product is expensive and clients are large, but if the entire, annual Memphis market is $100,000, it’s hard to make the math work.

So the lesson learned (or relearned…) was that every rose has its thorn… and that a fundental per unit negative margin cannot be made up through volume…

Rome wasn’t built in a day…

And neither are sustainable, profitable businesses. Starting and running a successful company is hard!Sure, you can build a web-based system in a weekend, and if you get really lucky the concept catches on and you drive a lot of traffic to your site. But even one of the great success stories that comes to mind, HotOrNot.com, took eight years to get acquired.

So am I saying that Startup Weekend is a waste of time? Absulutely not! A great group of people got together, seeds were planted, some potentially great websites and business are getting launched, and on top of all, the entrepreneurial flame was lit in several people. This will inevitably lead to future growth for Memphis, whichever shape or form it will take.

If you’re involved in startups, you hear about pre-money all the time: “…what was the pre-money of your last round?”, “The pre-money of your last round was a little rich…”

But if you’re new to all this (or you’re not, but don’t want to show your ignorance) this post will hopefully clarify the term a little.

What is Pre-Money?

What it really stands for is “pre money valuation”, and it means, quite literally: “what was the valuation of your company before (new) money is being invested?”.

But… (and there’s always a but) it comes in various flavors and is often more art than science.

An example

Say you’re the founder of a new medical device company. You’ve built a prototype in your garage with some friends and want to start raising money to commercialize the product. After talking to a lot of VCs, you finally get one of them to give you a term sheet for an investment and it says your “pre-money valuation is $3,000,000″.

This implies that all the work you and your friends have put into the prototype, up until the point of taking the investment, is valued at $3,000,000. If it took you a combined 6 months of work, that’s a pretty good deal, but if it took all your spare time over the past 8 years, it’s maybe not such a great deal…

One thing that investors might do to dampen the blow of a low valuation is to add new options to the pre-money, so the termsheet might say: “Firm X will invest $4,000,000 to purchase 4,000,000 shares of preferred stock in Acme Coporation and will invest at a pre-money of $3,000,000 to include an increase of the option pool of 1,000,000 unallocated options.”.

Translating this into plain English means that Firm X buys shares for $1.00 per share (4 million shares for $4 million). They are also adding 1,000,000 new share options to the pool before putting in their money and “hide” them in the pre-money valuation. The value of these million shares is $1,000,000. So in this case the true value attributed to your hard work is not the $3 million that’s stated in the termsheet, but $3 million minus the value of the new options, so the true pre-money is $2 million.

Not sneaky, and fairly common practice. Just something to be aware of.

So, is it always good to get the highest pre-money possible?

Not necessarily… The higher the pre-money, the more ownership you retain as the founders – that’s good. But you also have to look at the future. Say, you’re able to convince your Uncle Ted that you medical device company is worth $20 million today, and that he can buy 0.25% for $50,000. You tell him that eventually the company will sell for $400 million, so his 0.25% might be worth about a million bucks, or 20 times his money. Not a bad, deal, eh?

You’d be right if all you needed is Uncle Ted’s $50,000. However, more likely than not, a medical device company needs tens of millions to get to a $400 million exit event. So besides Uncle Ted, eventually you’ll have to go talk to VCs, which brings us to the next topic: Post-money Valuation. The VCs will tell you in no uncertain terms that the “post” on the last round with Uncle Ted was way too high, and that they only value the company at the previously mentioned $2-3 million. Not the news you wanted to hear… but you need their money… Now you have to go tell Uncle Ted that his 0.25% has gone to 0.025% overnight… a painful conversation…

This example is fairly extreme, but it illustrates the point. A high “Pre” results in an even higher “Post”, where post-money valuation is simply Pre-money valuation + Invested Capital = Post-Money Valuation. Be realistic about your valuation and keep future funding rounds in mind. Typically, VCs will want to own a large chunk of your company (20-40%) and that’s how they triangulate a valuation. Say you’re raising $3 million, that puts your pre-money somewhere between $4.5 million and $12 million. A pretty wide range… The rule of thumb is that the more risk (technology, market, financing) is still left in the company, the larger a percentage investors want for their money.

Do your research and talk to some folks about what typical valuations are for different investment rounds. This differs widely from one industry to the next. Note that every industry has its outliers, with Microsoft’s investment in Facebook valuing that company at $15 Billion or so, but that most companies in an industry are close to the mean. To avoid disappointment, assume the mean for your company and hope to be an outlier (on the high end!): “the market” will tell you where you really stand.

Hopefully this all makes sense to you. If not, or you have additional thoughts, feel free to leave a comment.

A new section of the website show a map of the Memphis area with pins for locations of startup companies. Although a work in progress, the map will show all the entrepreneurial activities in Memphis and give a quick visual overview of where the different hotbeds are.

You can find the map by clicking Memphis Startups in the main menu bar or go there directly by clicking this link.

The list of companies is being added to as we speak, so if you find your company missing, wait a day or two, or send an email to Jan Bouten.

When you’re raising money from a venture capitalist and you’re fortunate enough to get one or more to the point where they want to invest, they’ll issue you what is called a term sheet. The content will depend on your company as wel as the VC firm issueing the terms, but there is an industry-wide jargon that is important to understand, as you will likely not have come across it in any other setting. This series will discuss these terms and attempt to demystify them.

The natural way to process information is to work your way forward in time, ie. you deal with what you need to do next first: left to right. I learned from a very successful entrepreneur, Larry Wilson, that sometimes it’s a good exercise to work the other way around: right-to-left.

Look at what you want achieve in the future, or at the end of a project and work your way backwards. What specific tasks do you need to complete and when do you need to complete them to get to your final goal?

This mental exercise can very easily be applied to starting a business.

Say you want to start a medical device business that brings a novel glucose monitor to market. Eight years from now, you’d like to have the business up and running, sell 75,000 units per year, have revenues of $50 million and employ 200 people. What all needs to happen to achieve this?

Working backwards and knowing that companies take time to scale to $50 million in revenue, you can assume that to get to selling 75,000 units in year 8, you had to sell the following in prior years: year 7 = 50,000 units, year 6 = 25,000 units, year 5 = 10,000 units, year 4 = 3,000 units, year 3 = 500 units. To build 500 units in year 3, you need to have your product ready for volume manufacturing. You can safely assume that you should spend most of year 2 finalizing your production prototype and getting it through FDA regulation and manufacturing selection and optimization.

To sell anything in year three, year 2 should also have a strong focus on business development: taking the protoype on the road, showing it at tradeshows and signing up distributors. So that leaves only year 1 for product development. One year is not very long to develop a product, so to make this tight deadline, you should make sure that the technology the device is based on is already proven and mature. If the core technology to build this product is on a lab bench in a university lab, your final goal in year 8 might be too ambitious. At this time you can either adjust your final goal by scaling back revenue, or pushing the goal further into the future and do the mental exercise again.

Once you’re satisfied with the major milestones and time lines, you can use this as a skeleton to build the rest of the company around.

What types of employees do you need to hire and when? In this case, you’ll need a bunch of seasoned medical device engineers to start building the device: electronics, software, mechanical. To direct their effort, you’ll need a seasoned product manager who can translate the market requirements into technical requirements. That leads to your first hire (or it could be you!): a seasoned medical device executive to think up the market requirements. Someone that can talk to potential customers and partners, understands the market, the competition, knows what features are table stakes, and knows what new features the market wants.

How much money do you need and when? Now that you know who to hire and when, how much will it cost? Initially, you want to get experienced folks that don’t need much hand holding. In many startups, if you on average budget $100-$125K annually per initial person, you’ll be in the general ballpark. Say you have five folks the first year and need about $300,000 in materials, prototyping and services, you’re looking at a $800,000 to $1,000,000 needed in the first year of operations.